‘Too-Big’ Insurers, Loss Absorbency, SAC: Compliance

By Carla Main -
Aug 13, 2013

The Financial Stability Board said
an extended version of its guidance on the resolution of
systemically important banks will apply to non-bank financial
institutions, such as Allianz SE (ALV) and other large insurers.

The Basel, Switzerland-based body set up by the Group of 20
nations has developed “annexes” to its advice for local
regulators of financial institutions that aren’t lenders,
according to an e-mailed statement yesterday. The FSB asked for
responses from market participants by Oct. 15.

The FSB, led by Bank of England Governor Mark Carney, is
coordinating the global regulatory response to the worst
financial crisis since the Great Depression to prevent a repeat
of the turmoil that followed the collapse of Lehman Brothers
Holdings Inc. and bailout of American International Group Inc.

The FSB “set out the core elements considered necessary to
make feasible the resolution of financial institutions without
severe systemic disruption and without exposing taxpayers to
losses,” it said yesterday.

Compliance Policy

U.S. Watchdog to Propose Greater Disclosure in Auditors’ Reports

Auditors could be required to better explain how they
graded a company’s financial statements under a proposal that
would trigger the first change in 70 years to how auditors
report their findings.

The Public Company Accounting Oversight Board is scheduled
to vote today on a plan meant to amplify the information
investors receive from the auditor’s report. The PCAOB has
studied ways to overhaul such reports since the 2008 financial
crisis.

The PCAOB has said it could seek to force auditors to
provide a supplemental report explaining their findings.
Alternately, the board said it could seek to make audit firms
provide a few sentences highlighting the most critical parts of
the financial statements.

The board’s vote will open a period of public comment
during which audit firms, public companies and investors lobby
to shape a final standard, which would have to be approved by
the Securities and Exchange Commission. The PCAOB was created by
the Sarbanes-Oxley Act of 2002 and sets standards for auditors
of U.S.-registered firms.

Some investors have pushed for more specific information
about an auditor’s findings, which are disclosed in a brief,
one-page opinion that states whether a company passed or failed
the audit. Groups such as the Council of Institutional Investors
support requiring auditors to provide a separate narrative that
explains the company’s accounting judgments and estimates.

The largest accounting firms, represented by the Center for
Audit Quality, have pressed the PCAOB to maintain the current
reporting model while better explaining the roles of audit firms
and management in preparing financial statements.

Instead of a separate narrative, the PCAOB could propose a
requirement to use “emphasis paragraphs,” or disclosures of
judgments behind accounting estimates and areas with measurement
uncertainty.

Derivatives Margin Losses Could Help Save CCPs, Regulators Say

Derivatives traders should be prepared to lose the initial
margin they post at clearinghouses if it’s needed to prevent a
financial crisis, global markets regulators said.

The “margin is likely to constitute a very large pool of
assets which would, if it can be used, provide a high degree of
loss-absorbency” to help stabilize a central counterparty, or
CCP, the International Organization of Securities Commissions
and the Committee on Payment and Settlement Systems said in a
joint report published yesterday.

The committee is part of the Bank for International
Settlements.

The Group of 20 nations has ordered a global overhaul of
rules governing derivatives contracts, mandating the use of CCPs
by traders. Regulators have sought tougher rules for over-the-counter derivatives since the collapse of Lehman Brothers
Holdings Inc. and the rescue of American International Group
Inc., two of the largest traders of credit-default swaps.

Clearinghouses such as London’s LCH.Clearnet Ltd. and Eurex
Clearing AG operate as central counterparties for every buy and
sell order executed by their members, who are required to post
collateral, reducing the risk that a trader defaults on a deal.

Madrid-based Iosco brings together national market
regulators from more than 100 countries to coordinate rules and
share information.

CIRC Head to Expand Scope of Insurers’ Investments, Caixin Says

The China Insurance Regulatory Commission will expand the
industries in which insurers may invest as debt holders,
Caixin’s New Century magazine reported, citing an interview with
Xiang Junbo, head of the commission.

CIRC is studying how to set up a fund for insurers to
invest in small companies, Xiang said, according to the Caixin
report. Investments by insurers in local government financing
vehicles are currently less than 200b yuan, Xiang said in the
magazine interview.

The commission is also studying new rules to govern
Internet insurance operations, Xiang said, according the
magazine.

The Commodity Futures Trading Commission has requested
documents dating to the start of 2010 about the banks’ commodity
warehouses, according to the people, who asked not to be named
because the subpoenas are private. Glencore Xstrata Plc, which
owns warehousing business Pacorini, also received a subpoena,
another person said.

MillerCoors LLC, Encore Wire Corp. (WIRE) and other metal users
have complained about long queues and artificially high prices
at the warehouses, particularly for copper and aluminum.

Dennis Holden, a CFTC spokesman, declined to comment on the
subpoenas.

The subpoena to Goldman was also sent to its Metro
International Trade Services unit, which stores aluminum, copper
and other metals as part of the London Metal Exchange system.
JPMorgan owns Henry Bath & Son Ltd., a founding member of the
LME and a warehouse operator. Glencore, the biggest publicly
traded raw-materials supplier, is one of the largest owners of
warehouses monitored by the LME as lawmakers and regulators
increase scrutiny.

Global aluminum costs were inflated by $3 billion in the
past year through unfair rules that allow warehouse owners to
slow deliveries, Tim Weiner, a global risk manager at Chicago-based brewer MillerCoors, said in written testimony before his
July 23 appearance at a U.S. Senate hearing.

Senator Sherrod Brown, an Ohio Democrat, said he plans to
hold additional congressional hearings on banks’ ownership of
mines, pipelines, tankers and warehouses.

London Whale Resurfaces to Help U.S. With JPMorgan Trading Probe

Bruno Iksil, the former JPMorgan Chase & Co. trader whose
bets caused more than $6.2 billion in losses last year, is now
central to any U.S. charges against his former colleagues.

Iksil, the Frenchman who became known as the London Whale
because of his trading book’s size, has been cooperating with
the Federal Bureau of Investigation and the Manhattan U.S.
Attorney’s Office for months in their probe of the New York-based bank’s biggest trading debacle ever, said three people
with direct knowledge with the matter. Iksil won’t face charges
as long as he cooperates and testifies, the people said.

Prosecutors may announce charges as early as this week
against former London-based JPMorgan employees, accusing them of
trying to mask losses on a complex derivatives portfolio, said
another person who asked not to be named because the
investigation isn’t public. The episode has already sparked a
Senate subcommittee hearing and prompted JPMorgan’s board to cut
Chief Executive Officer Jamie Dimon’s pay in half.

It still isn’t clear who may be charged, the person said.
Prosecutors also are weighing penalties for the bank, including
a fine and reprimand, the newspaper said in a subsequent report.

Jennifer Queliz, a spokeswoman for U.S. Attorney Preet
Bharara in Manhattan, and Peter Donald at the FBI’s New York
office declined to comment on the investigation.

For more, click here.

Deutsche Bank Said to Face Bafin Call Over Libor Rigging

Deutsche Bank AG (DBK) may be told as soon as this month by the
German financial regulator to improve its controls to prevent a
repeat of attempts to manipulate benchmark interest rates,
according to a person familiar with the matter.

Bafin is finalizing its first report into the rigging of
Libor and similar benchmarks and will submit it to the
Frankfurt-based lender as soon as this month, said the person,
who asked not to be identified because the review isn’t public.
Bafin will present its findings to Deutsche Bank management,
telling them to adhere to standards set by the regulator, the
person said.

The report is part of a broader investigation by Bafin into
allegations that traders at Deutsche Bank tried to manipulate
rates. Under its rules, Bafin cannot publish the findings or
disclose actions it takes on individual banks without the
lender’s consent. The regulator will oversee how the measures
are implemented.

The move may bring the bank closer to facing fines from
U.S., U.K. and EU regulators, who are waiting on the German
watchdog to finish their reviews. Barclays Plc (BARC), UBS AG (UBSN) and Royal
Bank of Scotland Group Plc have paid a total of about $2.5
billion in fines for colluding to rig benchmark interest rates
for profit or to mask their true cost of borrowing.

Bafin is in the final stages of reviewing the report,
compiled by the Bundesbank, Germany’s central bank, on whether
Deutsche Bank’s systems and controls failed to prevent traders
from trying to manipulate rates to benefit their own trades, the
person said.

Bafin’s press office declined to comment.

Christian Streckert, a spokesman for Deutsche Bank,
declined to comment on the report. He said the bank is
cooperating with regulatory investigations and conducting its
own review into the allegations.

“As per the current status of investigations, we can say
that no current or former member of the management board had any
inappropriate involvement in the interbank offered rates matters
under review,” Streckert said. The bank “has also found that
certain employees, acting on their own initiative, engaged in
conduct that falls short of the bank’s standards, and action has
been taken accordingly.”

Bafin has also commissioned an auditor to look into
possible wrongdoing by Deutsche Bank staff and management.

Finra Said to Look Into Analyst Participation in IPO Pitches

Wall Street’s self-regulator is looking into whether
research analysts are participating in pitches to win business
underwriting initial public offerings, according to a person
familiar with the matter.

The Financial Industry Regulatory Authority has requested
information from several firms, said the person, who asked not
to be identified because the probe may not result in a formal
investigation. The person didn’t say which firms were queried.

Since the dot-com bust a decade ago, investment bankers
have been restricted from arranging communications between
analysts, who provide recommendations to investors, and the
companies they seek business from. The JOBS Act, passed last
year, loosens those regulations when banks are dealing with
companies with less than $1 billion in annual revenue.

The rules were imposed in 2003 by regulators and by a
settlement between then-New York Attorney General Eliot Spitzer
and 10 firms including Goldman Sachs Group Inc. and JPMorgan
Chase & Co. Spitzer forced the banks to change their practices
after his office obtained internal e-mails from Merrill Lynch &
Co. analysts who privately called dot-com stocks they had
recommended “dogs” and “crap.”

Levitt Says Dodd-Frank Must Be Primary Focus of SEC

Arthur Levitt, former chairman of the Securities and
Exchange Commission, said the “number one priority” of the
agency must be implementation of the Dodd-Frank Act. Levitt
talked with Bloomberg’s Tom Keene on Bloomberg Radio’s
“Bloomberg Surveillance.”

For the audio, click here.

Comings and Goings

SAC Parameter Trading Unit Said to Close Amid Insider Probe

SAC Capital Advisors LP, the hedge-fund firm that’s facing
federal insider-trading charges and a money-laundering lawsuit,
shuttered one of its trading units, according to a person with
knowledge of the matter.

Parameter Capital, which was started by Anil Stevens and
Glenn Shapiro three years ago to trade financial stocks, managed
about $300 million, said the person, who asked not to be named
because the information is private. Stevens, 41, plans to start
his own firm and take as many as nine people with him, the
person said. Shapiro won’t be joining Stevens in his new
venture, the person said.

Stevens and Shapiro couldn’t immediately be reached for
comment. Reuters yesterday reported the closing of Parameter.

SAC Capital, run by billionaire Steven A. Cohen, was
granted court approval last week to continue operating until the
insider-trader cases are resolved. SAC, based in Stamford,
Connecticut, was accused by the U.S. government in an indictment
announced July 25 of engaging in an insider-trading scheme over
more than a decade.

The Parameter unit was based in New York and started in
2010 with 12 employees. Stevens and Shapiro rejoined SAC at that
time after working at Chicago-based hedge-fund firm Balyasny
Asset Management LP.